Second Quarter GDP Contracts 1.0%

GDP contracted by a 1.0% annual rate in April through June 2009. Economists were expecting a 1.5% decline, so this number is better than expected. It follows on the heels of a 6.4% decline in the first quarter and 5.4% in the fourth quarter of last year, indicating that economic conditions are indeed improving. Or, getting worse at a slower pace, for you curmudgeons out there.

Some highlights and lowlights:

• Consumer spending, which is the largest component of GDP (roughly 70% is what they teach you in Macro class) slid by 1.2%, after increasing 0.6% in the first quarter and dropping 3.1% in the fourth quarter. Clearly the rising unemployment rate is hurting consumers causing many to cut back on spending and increase savings (if they can.) I believe that a higher savings rate is healthy for our economy in the long run, not to mention far less stressful for those who are discovering how difficult it is to be up to their eyeballs in debt while facing a very tough job market.
• Trade boosted GDP by 1.38% as exports fell by 7.0% and imports decreased by 15.1%. The shrinking of the trade deficit is also a positive long-term sign of a new, more prudent US, but our trading partners are not too happy about it. Our rabid consumption of overseas goods has allowed our trading partners to grow far more than their domestic consumption would've allowed. The reversal of this trend if proving very painful for them.
• Residential fixed investment, which includes spending on housing plunged by 29.3% on the heels of a whopping 38.2% decline in the first quarter. Housing is still a rather large drag on the economy.
• Government spending rose 10.9%, after declining 4.3% in the first quarter.
• The PCE price gauge, excluding food and energy rose 2.0% after rising 1.1% in the first quarter. You don't need to take an economics class to know that contraction plus inflation is not good.